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SDL – following an August profit warning...

By Steve Moore | Friday 15 December 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

“SDL plc (SDL), a leader in global content management and language translation software and services, is providing an update on the trading performance for year ending 31 December 2017. SDL's sales pipeline for the period is in line with expectations. However,”… Uh oh.

… to meet earnings expectations “the group is reliant on the closure of certain software deals, which may not be processed and fully awarded by 31 December 2017”. Also noted is “a faster than forecast shift from perpetual licence sales to Software-as-a-Service sales. This has resulted in higher costs recognised in the year, with revenues deferred into future years”.

Broker to the company, N+1 Singer, has responded by reducing its earnings per share forecast by 7% to 19.2p. However, this again reflects that it is only cash which is reality as SDL’s announcement also includes “the nature of our technology investments, coupled with improvements to the group's systems and processes now require us to capitalise a small portion of our annual development spend, which has risen in the year. In 2017, the group expects R&D capitalisation to be £2 million to £3 million”. Hmmm. The underlying reduction is thus more like 18%.

Looking further ahead the company states, “the outlook for our industry remains very positive and, with the right level of investment, the group believes it can move to the forefront of its industry. SDL remains committed to delivering double digit revenue growth and mid to high teens profit margins over the medium to long term”. Being ‘committed’ doesn’t mean it will achieve though – and I note a like-for-like reduction in forecasts of more than 20% for next year (to 23.4p of earnings per share).

These compare to more than 26p achieved on the former, less favourable, basis in 2016 and more than 27p then expected for 2017 and circa 30p for 2018. There though has already been a profit warning this year – the company revealing “sales growth has come ahead of the operational efficiencies we are investing to deliver and has incurred higher costs of servicing, predominantly through the use of freelancers. We do not expect the impact of these higher costs in the first half to be recoverable in the second half”… on 1st August!

The shares slumped to below 450p by the end of that month and were slightly higher – until this latest, which currently sees them at 350p. With the half-year balance sheet having shown cash (net) of £26.1 million and current assets over total liabilities of £14.1 million (17p per share), the shares still don’t look cheap on an earnings basis - let alone a cash generation one. Bargepole / sell.

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